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Payment Practices Deteriorating Across Asia

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Payment Practices Deteriorating Across Asia

COVID-19 is causing an unprecedented interruption in business activity across Asia as global trade is projected to plummet by as much as 15%. Businesses are up against major liquidity constraints. As a result, payment practices are deteriorating. The Payment Practices Barometer survey of businesses in the region by trade credit insurer Atradius reveals a concerning trend of rising payment default risks, bad debts and insolvencies.

Late Payments Run Rampant

The survey, which included firms in China, Hong Kong, India, Indonesia, Singapore, Taiwan and the United Arab Emirates, found that late payments affect more than half (52%) of the total value of B2B invoices issued in Asia, largely due to liquidity restraints.

China and Singapore both are trending better than the region’s average, but India and the UAE are in the opposite boat. Late payments there amount to 66% and 72%, respectively, of the total value of B2B credit sales, locking up a significant portion of working capital for weeks at a time. Payment terms in both India and the UAE are significantly longer than in other countries surveyed (UAE has the longest, with 57 days on average). Companies operating in either India or the UAE need to be aware of the situation, as it can be a notoriously difficult and long process to recover outstanding receivables through local courts.

Across the board, late payments have a negative cascading effect for Asian firms: When businesses don’t receive timely payment, they in turn delay payment of invoices to their own suppliers or turn to domestic supplier credit for short-term trade financing. Chasing overdue invoices also ends up eating up a large portion of a company’s time, resources, and funds. One silver lining here: firms in Hong Kong, Taiwan, and China appear to be quite successful in their collection efforts, indicating an overall benign business environment in these markets.

It is important to note that the survey was conducted in March 2020 and conditions have only further worsened since then. Supply chains have been thrown into chaos by the global spread of COVID-19. Major portions of the economy have been shut down for months, and it’s impossible to immediately resume normal supply chain operations. Every part of the production process is cloaked in uncertainty, causing enormous liquidity pressures. To make matters worse, after being less than fully operational for weeks or months, companies are also seeing a downgrade in their creditworthiness, making it difficult for them to obtain funding lines from banks.

Minimizing Credit Risk in the COVID-19 Era

Undoubtedly as a response to the current challenging environment, companies across Asia have expressed an increased commitment to tighter credit management.

To protect their accounts receivables, many Asian firms are increasingly turning to credit management tools and tactics, such as reducing single-buyer concentrations, self-insurance, credit insurance or demanding cash payment, letters of credit or payment guarantees. Self-insurance remains preferred for many companies in the region, especially India.

Many companies rely on a variety of tactics, and the popularity of each varies by country. In the UAE, for instance, bank guarantees and letters of credit are popular, whereas Hong Kong firms prefer to use self-insurance and trade credit insurance and Chinese businesses heavily rely on guarantees of payment prior to a credit-based sale.

Open account credit for B2B transactions is gaining popularity for Asian firms overall, as evidenced by a trend toward lengthening payment terms. The UAE leads the pack among surveyed countries in terms of percentage of the value of B2B sales made on credit (64%) and payment terms (57 days). For comparison, the regional average is 56% and 43 days.

A shift toward open account credit may be in part due to businesses wanting to offer more competitive sales terms amidst the U.S.-China tariff uncertainty or to better negotiate supply chain and trade challenges created by the pandemic. This is likely the case in Taiwan, for instance, where there was previously reluctance to use open account credit – now, credit-based B2B sales make up 54% of the total value of B2B sales, compared to 43% last year. China has also seen a reversal of typical payment practices and now more than half of B2B sales in the country are made on credit.

A Reason to Hope?

Even considering the challenging economic conditions and deteriorating payment practices, firms across Asia express optimism in the future, with many survey respondents expressing belief that both sales and profits in their industry will improve in the near term. But again, that was in March, and we have every reason to believe that this optimism has since faded.

While the total impact of the global pandemic remains murky, what is clear is that businesses throughout Asia would benefit from coherent credit management strategies that have buy-in from all parts of the business, including sales. It’s more important than ever for companies to know their customers, keep tabs on their customers’ financial standing and regularly review both their credit management strategies and the liquidity positions of trading partners.

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Gordon Cessford is the president and regional director of North America for Atradius Trade Credit Insurance, Inc.

supply chain

Three Supply Chain Lessons for Businesses Coping with COVID-19

As governments and healthcare agencies around the world work to stop the spread of the coronavirus, importers and exporters across 164 countries are struggling to manage the pandemic’s growing impact on their supply chains.

Despite past lessons from 2003’s SARS outbreak and 2011’s Fukushima tsunami about the hidden weaknesses in their supply chains, companies are challenged to manage logistics concerns stemming from sourcing strategies and risk management.

Developing a methodical supply chain response to the coronavirus pandemic will prove challenging, given the scale and rate of the pandemic’s spread. That said, supply chain leaders must mitigate such disruption and plan for future incidents, or risk falling behind.

Here are three lessons that the logistics industry can take away from the ongoing pandemic:

Lesson one: Evaluate your supply chain design

Current supply chain designs have predominantly followed a one-size-fits-all philosophy, on the assumption that raw materials are readily available for sourcing and production globally. While this has enabled a lower ‘cost-to-serve’ model, recent trade tensions and now the coronavirus pandemic have thrown a curveball for the global logistics environment.

Organizations should aim to optimize production and distribution capacity of their supply chain with dynamic, rather than static, operational capabilities. For example, a technology company can consider diversifying production facilities with local sources of supply in each of its major markets, rather than relying on a single source. In some companies, supply chain managers recognise the risks of single sourcing, but do so to keep costs low. These decisions trickle down the supply chain, affecting customers who do not directly source materials from impacted countries but whose suppliers do.

To prevent such future situations, companies should research suppliers in different geographical locations in anticipation of rerouting shipments from affected countries or consider having a secondary source outside the primary region to mitigate the impact. This can help further diversify the value chain.

Lesson two: Apply risk management principles in advance

While many global firms recognize the value of a risk management plan, it is often placed at the bottom of the priority scale in the absence of a crisis situation. According to a paper published by the Global Supply Chain Institute at the University of Tennessee, only 25% of a typical company’s end-to-end supply chain is being assessed in any way for risk.

Supply chains inevitably have multiple dependencies, but firms can proactively manage possible vulnerabilities at every stage through their risk management plans.

For example, having an accurate assessment of inventory is a given, but it is also critical to understand how restrictions on imports from China and affected countries will impact current inventory and regular shipping cadence. Interruption risk management strategies, including mapping and monitoring suppliers, should be applied when developing an informed inventory plan. Companies must also look ahead to forecast if the demand for goods may change in upcoming weeks – bearing in mind decreases in air capacity due to cancelled passenger flights and higher logistics demand due to current backlogs.

Lesson three: People first strategy

Above all, remember that people are the most affected throughout this pandemic. The health and safety of employees and customers must be prioritised amidst this evolving situation. Wherever possible, activate contingencies for remote-working arrangements, and implement a clear communications plan within the organisation. Doing so will go a long way in keeping employees informed while ensuring business operations are minimally disrupted.  For example, companies can develop an online information hub to address frequently-asked-questions and outline company policies that map out staffing plans.

Involve your suppliers within these plans as well – align on operational readiness including appropriate staffing numbers and facility planning for surges in volume.

Maintaining flexibility in customer support and services to customers in these difficult times is key – and how effectively a company responds to these issues will mean they remember you when things take an uphill turn again.

Plan ahead to navigate disruption

While global events such as the coronavirus pandemic are impossible to predict, it is possible to cushion their impacts by increasing supply chain preparedness. Companies must keep their contingencies in place before a crisis occurs. And when these crises do occur – these businesses will rise again.